Being One Step Ahead of the new Mutual Fund Changes

Like it or not, your Mutual Fund holdings, at least some if not all, are already undergoing significant changes. While the changes in some were predictable, there are instances where the proposed changes were never imagined. Now, everyone from advisors and distributors to AMCs and mostly importantly the investors are starting to scramble to make sense out of the commotion!

Since the mutual fund AMCs have started to list out the changes in their schemes, there have been plenty of eyebrows raised with some of their decisions.

For example, one particular AMC had a Liquid Fund and a Money Market Fund prior to re- categorization. As per the new re-categorization rules, there is a Liquid Fund and a separate Money Market Fund Category. The AMC has gone ahead and moved their existing Liquid Fund into the Money Market Fund category and vice versa!

Another major example is that of another AMC, where they have changed the mandate of an existing MultiCap Fund to that of an Aggressive Hybrid Fund (where only up to 80% can be invested into equities ) as per the new rules. In addition, they have decided to merge one of their existing Balanced Fund with this newly formed scheme. The N.A.V. of this newly merged entity would be that of the earlier existing MultiCap Fund.

The same AMC has dealt another googly by changing an existing pure Equity scheme to a Balanced Advantage Category Fund (a fund that manages debt and equity allocation on a dynamic basis). Note that there is no cap on either asset class as per new rules. Furthermore, they have merged another existing Balanced Fund into this new scheme, while keeping the N.A.V. of the prior equity fund. The fund could now theoretically go 100% into debt or the other way as per the discretion of the fund manager.

Another example is that of an AMC that had an Ultra Short Term Fund and separately also ran a debt fund that primarily invested into bonds of Banks and PSUs. Post the introduction of the re- categorization rules, the AMC has merged the above Banking and PSU fund into the Ultra Short Term Debt Fund. It has further gone on to change the mandate of an existing Short Term Debt Fund into a Banking PSU Fund as per new rules. Now imagine the plight of an investor who was anyways confused with the huge universe of schemes. If he/she is not careful, he/she might end up investing into the current Banking and PSU fund expecting to remain in that category when it actually will get merged into an Ultra Short Term Fund. Or he/she may invest into the current Short Term Debt Fund not realizing it will become a Banking and PSU fund shortly. These unintentional errors could have big implications later on the mutual fund portfolio.

There are thousands of mutual funds schemes out there. And if not selected right, which can often be the case, investors end up with a plethora of funds in their portfolio over time. Now imagine looking at your fund list and realizing that a lot of them are going changes and may come out as something new and unintended. In such a context, it is easy to make unintended errors or make ill informed decisions in deciding what to do next with your mutual fund portfolio.

It is with this concern in mind that Plan Ahead Wealth Advisors is conducting a seminar tomorrow at The Regus, Andheri West to enlighten both our clients and their friends and families, on the impact this massive reorganization of mutual fund schemes will have on their portfolios and how they can navigate these changes in an efficient way.

While it may seem a little inconvenient to come out on a Saturday 19^th May 2018 to attend this event, the take away from this event could lead to much better decision making on your current mutual fund holdings in the immediate future!

 

 

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Power of SIP

Mutual Funds have surely caught the fancy of the Indian Investor community with net flows crossing one lakh crores in 2017! Unlike in the past years, almost everyone we speak with has probably heard of mutual funds. The strong rise in awareness of this investment vehicle has even prompted the Association of Mutual Funds India (AMFI) to cash in on it, with their recent on going advertisement campaign, “Mutual Funds Sahi Hai”.

But what caused this sudden optimism and acceptance of mutual funds as an investment option? It clearly is not a “new trendy option”, for mutual funds have been around for over two decades. While a lot of its features and advantages may contribute to its overall success, one key factor that really has drawn the Indian investor to mutual funds is its ability to create long term wealth, not only for those who invest big lump sums in it, but more decisively, for the salaried class.

The most commonly availed route to invest in mutual funds for the a salaried investor has been Systematic Investment Plan (SIP). It has become synonymous with mutual fund investing. So how does an SIP work? And how does it help in long term wealth creation?

A SIP is simply an investment process to invest systematically every week or month or quarter into a mutual fund scheme at a periodic chosen date. The intent behind this process is that by investing small amounts over a medium or long term tenure, you are sidestepping the issue of market timing. Market timing being the decision to invest based on your view of market movement. As investments will be done over a period of time, such installments would get both the highs and lows of the underlying market, thereby averaging out the purchase cost. This concept is called Rupee Cost Averaging. But for the salaried class a SIP has been looked as a convenient method of investing, as investing monthly from the salary income is a easily achievable goal.

And what about the question of wealth creation? How can a SIP help with wealth creation?

A SIP is a great example of the Compounding Effect, referred to as the Eight Wonder of the World by Albert Einstein. Compounding, or Compound Interest, is the phenomenon where alongside the principal, the interest earned is also reinvested at the same rate of return. So if in Year 1 the principal invested was Rs, 10,000 at 10% rate of interest, the interest to be received at the end of the year would be Rs, 1000. Now because of compounding, the interest is added to the principal in the second year, making principal amount to Rs 11,000 on which 10% returns are gained, resulting in Rs 1,100 as interest in second year and so on so forth. This interest reinvestment is crucial because with passage of time, the increase in principal results in disproportional returns during the latter periods of the investment tenure.

The following table shows how certain equity mutual funds have grown a modest SIP amount of Rs 10,000 per month in the past 10 years:

Fund Name	10 year CAGR (rolling returns)	Total SIP Amount	Market Value
A diversified equity fund	24.72%	Rs. 12 lakhs	Rs. 51 lakhs
A large cap fund	22.98%	Rs. 12 lakhs	Rs 45 lakhs
A flexi cap fund	22.96%	Rs. 12 lakhs	Rs 45 lakhs
A large cap fund	18.96%	Rs. 12 lakhs	Rs 35 lakhs

(Source: Value Express as on 30^th Sept 2017) (Note: All fund data taken for regular plans with growth option)

The following chart shows the value of the investment accelerate due to compounding over time.

(Note: Fund data used is of Diversified Equity Fund from the above table)

Another factor to consider when thinking of compounding is time. The longer you invest and hold the investment, the better results it will provide. The following table is a clear example of the same. Taking the same funds as in the above table, if an investor started late and had to invest for the second half i.e. 5 years and even if he invested at double the SIP amount i.e. Rs 20,000 per month, he/she would not achieve the same end result:

Fund Name	5 year CAGR (rolling returns)	Total SIP Amount	Market Value
A diversified equity fund	19.36%	Rs. 12 lakhs	Rs 36 lakhs
A large cap fund	16.07%	Rs. 12 lakhs	Rs 29 lakhs
A flexi cap fund	19.05%	Rs. 12 lakhs	Rs 35 lakhs
A large cap fund	18.92%	Rs. 12 lakhs	Rs 35 lakhs

(Source: Value Express as on 30^th Sept 2017)

(Note: All fund data taken for regular plans with growth option)

As you may have noticed, barring the last large cap equity fund, all other funds performed significantly better over 10 year tenures, resulting in higher gains, even though in both cases the principal invested was the same.

As an investor you may have noticed various advertisements where mutual Funds are showcasing how much an SIP into their best performing star fund may have grown into, in a certain number of years. While the growth story in many such funds has been substantial, the key note all investors must keep in mind is that this is the result of staying invested into the fund for the long haul, including the times when the fund may have under performed. Compounding and a SIP will only go hand in hand when the investor has the horizon and patience to continue the SIP for a long tenure.

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What should you be doing about your taxes: A glimpse into NRI taxation

A large number of NRIs do not file taxes, as they live overseas and therefore believe that there is no need. However, there are two major situations when NRIs should file returns in India. Firstly, if the income earned in India exceeds the maximum permissible limit as basic exemption. At this point, the maximum exemption limit is Rs. 250,000. Incomes like salary arising from services provided in India, income from house property, capital gains arising from sale of property in India, income from deposits held in India will be taxable in India. Secondly, they should be filed to claim return if deducted tax is more than what was payable, so that you can claim a refund.

There are two major situations when NRIs should file returns in India. Firstly, if the income earned in India exceeds the maximum permissible limit as basic exemption. At this point, the maximum exemption limit is Rs. 250,000. Incomes like salary arising from services provided in India, income from house property, capital gains arising from sale of property in India, income from deposits held in India will be taxable in India. Secondly, they should be filed to claim return if deducted tax is more than what was payable, so that you can claim a refund.

A lot of NRIs are unaware of the fact that in order to track expenses and investments above a certain threshold for all individuals – residents or NRIs, Annual Information Reports (AIRs) have to be filed by various entities in India like banks, Mutual funds,  bond issuers, registrars for real estate purchases above a certain value, amongst other transactions. Therefore, you could get a notice due to these reasons if your name appears in an AIR and you are not filing tax returns. Whilst this may not mean that taxes are due, you will need to respond to the notice, which can be rather challenging if you are out of the country. Thus, it is advisable to have your taxes in India in order.

If you are a tax resident in geographies where you may be able to take tax advantage of the double taxation avoidance treaty between India and that country, you must take advantage of that. If you sell direct equity/stocks, short term capital gain applicable is 15%. The long term capital gain on sale of direct equity is Nil ie for equities held over 1 year. NRIs have to trade through a broker if they wish to invest in direct equities. They can trade only on delivery basis and intraday trades are not allowed. They have to open a Portfolio Investment Scheme (PIS) account where their trades get reported within 24 hours.

If you are a tax resident in geographies where you may be able to take tax advantage of the double taxation avoidance treaty between India and that country, you must take advantage of that.

Debt and Equity Mutual Fundshave different tax rules. For equity Mutual funds the tax rate applicable is 15% for holding period of less than 12 months and for holding period of greater than 12 months it is Nil. Non equity mutual funds ie debt funds, gold funds, are taxed like real estate ie the tax rate for a holding period of less than 36 months is as per the marginal rate. If you hold them for a period greater than 36 months a long term capital gain tax rate of 20% with indexation is applicable .

If you are looking at investment options to save for your retirement goal then New Pension Scheme is an option you can look at. NRIs are allowed to invest in NPS.

NPS is useful for NRIs living in Middle Eastern countries, since they do not have mandatory social security benefits in their countries of residence unlike many other geographies. NRIs own contribution is eligible for tax deduction u/s 80CCD (1) of income tax act up to 10% of gross income with overall ceiling of Rs. 1.50 lakhs u/s 80CCE of income tax act.From FY 201516investors are allowed tax deduction of additional Rs. 50,000 under 80CCD1(B).

NRIs wishingto invest in FDs can look at Foreign Currency Non Resident ( FCNR) deposits. It is in the form of a fixed Term deposit account denominated in foregin currencies. In this case NRIs can park overseas income as foreign currency in India without having toconvert it to Indian Rupees. The rates on these deposits depend on tenure of investment and the currency in which you park your funds. Principal and interest are fully repatriable. For NRIs interest is not taxable in India. However, they could be taxed in the country of residence of the NRI, for example in the US. Similar is the case with NRE accounts.

A resident foreign currency account (RFC) account can be used by NRIs who are returning back to settle in India, to park overseas income as foreign currency in India without having to convert them into rupees. Funds are fully repatriable and can be transferred from RFC to NRE and vice versa. Interest earned on RFC account will be exempt from income tax as long as you are Resident but not ordinary resident (RNOR).

Image credit: www.taxinsightworld.com

 

 

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To hold on to it or to let it go?

“The only real battle in life is between hanging on and letting go.”

― Shannon L.

                

             

This is exactly what you need to ask yourself while reviewing your existing set of investments.

Once you have decided your goals, you need to review your existing investments. This will give you a sense on which is the ones that are not doing well so that they can be replaced. It will also help you understand based on your asset allocation and goals that going forward where you need to invest so that your investments are in line with your goals.

You may be having some investments in stocks, Mutual funds, Real estate, fixed deposits, gold, etc. Or there are even chances that your investments may be concentrated in some of the assets.

Here’s what you can do

Stocks and Mutual Funds

If you have stocks in your portfolio and you understand bit of markets then you can decide based on what is happening in the economy, what are the sectors that are outperforming or under performing at that point in time, the demand environment, the credit environment, etc.  and accordingly decide whether you want to keep it or sell it.

A better way to do this would be by investing through Mutual Funds. There you will benefit from the expertise of the fund manager. It will also save you from micromanaging at security level. With the introduction of direct plans, you can now invest by paying a lesser expense ratio compared to a regular plan. Mutual funds can be used to take exposure in equity, both domestic and international, debt, mix of debt and equity through balanced or Monthly income plans, commodities and index.

Fixed Deposits

If you have Bank or company Fixed Deposits or Post office investments then you need to see the rate that you are getting on your FD and what is the interest rate expectation going forward. If your FD is due to mature shortly and there is expectation that interest rates are going to fall, similar to the current scenario, then either you lock in now at the existing higher rates or when your FD matures you can reinvest it in some other investment instrument depending on your goals. In FDs also there are Bank FDs and Company FDs. Company FDs offer comparatively higher returns but remember to focus on quality

Real estate

It’s not a great idea to lock in 70 to 80% of your wealth in real estate. Real estate has its own cycles of boom and depression. It’s difficult to sell these at the price of your choice. They are certainly not assets which can be sold immediately due to their illiquid nature. Doing so will need you to settle at lower prices. In real estate also there are some pieces which appreciate faster based on demand environment, location, etc. while some of them do not see much appreciation again due to unfavorable location, lack of demand, etc. Therefore, try to sell that piece of your property which is not yielding good returns and channelize your investments in some liquid and appreciating investments.

Gold

Indians have emotional value attached to gold. These days there are options like sovereign gold bonds and Gold ETFs which can fetch you returns both in the form of value appreciation and interest. Going forward you can start this paperless form of investing into gold.

Remember,

Keep the investments which are doing fine and have a good future outlook, and allocate them to your goals. Give up the ones which are loss making and you do not see a scope of recovery any time soon. It’s important to cut losses when required.

Last but not the least, remember why you are investing – don’t miss the forest for the trees.

Image credit: www.fotolia.com, financialtribune.com, www.colourbox.com, pondicherryurbanbank.in, www.etastar.com

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Financial Vows Every Newlywed should take..

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Healthcare – A Key Element of Retirement Plan – Vishal Dhawan in The Times of India

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Do SIPs in Equity Mutual Funds help in goal based investing?

Some days back, in a discussion with a friend of mine, we once again ended up discussing whether mutual funds and in specific whether Equity mutual funds, play any role in goal based investing. Can an investor gather any sizeable corpus by systematic investing?

After a lot of discussion and arguements both for and against from her side and mine, I presented to my friend the below example.

Suppose you were to invest Rs. 1000 in a SIP in a equity mutual fund from January 1995 till 30 Sep 2013, and invest regularly each month. Simultaneously one could also invest in the Sensex a similar SIP of Rs. 1000 for the same time duration. Once could argue that the returns would depend on the type of mutual fund scheme chosen. So as to avoid being partial to any particular style or scheme, we took the SIP and simulated it over many different types of schemes such as a large cap scheme, a mid cap scheme, a value category scheme and a hybrid equity oriented (balanced) scheme and the Sensex.

When we tried to map the values of these SIP investments, the results were as you can see in the graph below.

Scheme	Type	Value  of Rs 2.25 Lakhs	Returns (xirr)
A	Equity Large Cap Scheme	Rs. 24.3 Lakhs	21.7%
B	Equity Flexi Cap Scheme	Rs. 23.5 Lakhs	21.5%
C	Equity Mid Cap Scheme	Rs. 22.4 Lakhs	21.1%
D	Hybrid Equity Oriented Scheme	Rs. 20.1 Lakhs	20.2%
E	S&P BSE Sensex	Rs. 7.7 Lakhs	11.9%
F	NSE CNX Nifty	Rs. 7.6 Lakhs	11.7%

In the simple example above, we figure that an investor by investing Rs. 2.25 Lakhs over a time period of about 19 years, has been able to grow his money from a small Rs. 2.25 Lakhs to a sizeable corpus of Rs. 24 lakhs (in case of scheme A). She has been able to get phenomenal returns in the range of 20-21% each year, depending on the scheme selected (A to D).

Even if the investor had invested in either the BSE Sensex or the CNX Nifty (Scheme E or F), she would have made returns in the range of 11% each year.

This brings us back to the moot question. Can we use SIPs for goal based investing. The answer as we can gather from the above analysis is a big Yes.

For all of us who are looking at investing simple small amounts each month, without burdening ourselves with huge commitments, can look at this example as an easy solution to garnering corpuses for long term goals. Of course, there are a few caveats:-

– this example assumes systematic investing of Rs 1000 each month, without fail for the last approx. 19 years, which means riding through both bullish and bearish phases of equities and giving equity investments the time they deserve

– this example also assumes no redemptions have been made from each SIP investment, especially important during bearish phases where most of us contemplate stopping our SIPs

– past performance is not indicative of the future, but history does teach us some important lessons.

So keep investing towards your goals and keep the faith !

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Vishal Dhawan’s views on Sustainable Wealth Creation

Answers to an inquisitive audience on Sustainable Wealth Creation forum hosted by CNBC

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Retire Rich! Eight things you must know about retirement

Young and Carefree ? Plan for your sunset years

Retire Rich

Eight things you must know about retirement

New, young clients of mine, whom I’ll call the Kumars, visited my office.“With the hectic lifestyles that we lead,” Mr Kumar told me, “we’d like to retire when I’m 55, so that we may pursue our other interests, like travel and photography. And at 55, I’ll still be fit.” “Good idea,” I said, “I hope you’ll also be financially fit for that.”
They then showed me their file containing a neatly compiled list of stocks, mutual funds, insurance policies, bank FDs and suburban property they’d invested in. “So, what do you think?” asked Mrs Kumar after I had gone through the list. I admired their thinking about retirement even though the Kumars were only in their early 30s.Meanwhile, other average clients of mine put numbers to every one of their financial goals: house, car,children’s marriage and education,holidays… everything except retirement. I think it’s only because when people are young, even in their 40s,retirement seems too far away. But you’ll be surprised at the speed at which the good years go by.If you’re working today, retirement is quite a certainty—almost as certain as the bad old death and taxes.That’s why it’s critical to create a detailed plan, both from financial and emotional standpoints, and then go about executing it. And while you do that, there are eight truths you need to consider.

1. Inflation is your enemy :
   The average annual rate of inflation in India has been about 7.6% during the last 25 years. This means most of the things you buy are at least six times more expensive than they were in 1986. That won’t change when you survive long enough to look back in 2036, after another 25 years.So, if you spend Rs40,000 per month today and plan to retire in 2036, wishing to maintain the same lifestyle,you might then need about Rs.250,000 every month. In fact the future may not even be so bright! Considering all the excess money that has been printed across the world since 2008 to tide over the global financial crisis, don’t be surprised if you’ll need even more spending money in 2036. “Quantitative easing,” the economic euphemism governments use to describe printing excess money, is a known inflation enhancer.And then there’s what’s called “lifestyle inflation,” which can happen as you earn more. Foreign trips replace your domestic holidays and parking in with relatives back in your native place. One car for the family becomes one car for each family member. You wore the same clothes for years, but you find yourself buying new ones every season. If all this sounds familiar,you’ll need loads of spending money even after you retire.
2. You could live much longer than you think :
   Human life expectancy has steadily increased. A large number of us will end up spending as many years retired as we were working, maybe more. Some of my clients often disagree. They argue that the killer called stress, too, has increased. But then, medical advancements also increase dramatically, with newer stress, clot, cholesterol and cancer busters that help lengthen our lifetimes.Thus your retirement plan must address expenses over a much longer period, well into your late 80s, maybe longer. Factoring in inflation, those monthly expenses that could grow to `250,000 by 2036 may touch `15 lakhs if you survived till 2061, a “normal” 25 years after retirement. Scared? The “risk” of living very long is now very real. That’s why it’s essential to continue to make investments that will have the ability to beat inflation over long periods. Equity shares, equity mutual funds and real estate must be part of your investments, and good portions of them should be held even after you retire.
3. Your retirement plan needs to be your own :
   Without batting an eyelid, one of my clients who had fixed financial goals for everything except retirement, told me, “My son is my retirement plan.” A very endearing thought. But with an increasing trend towards nuclear families, your retirement plan needs to be far more robust. Your children will have their own financial goals which may not include you. Remember the Amitabh Bachchan-Hema Malini starrer Baghban, where the old parents they portray are made to stay separately after retirement, since none of their children will take in both of them? If your account book has such a retirement plan in place, watch the movie, if you haven’t already. It may actually be better than the book.
4. Buying pension plan is not a solution :
   Not long ago, the tax laws gave a separate annual benefit of  Rs10,000 if you bought certain pension plans. A very large number of people bought them for the tax benefit, and also in the belief that it will take care of their retirement. Yet, the amount they will receive on retirement will probably be enough for a couple of years’ expenses, nothing more. Any investment that you make for retirement need not have the word “retirement” in it. Stocks, bonds or good mutual funds can yield much better results and offer greater flexibility than the so-called retirement specific investments.
5. Your Expenses will not halve when you retire :Over time and from my clients’ experiences, I’ve learnt that there is a tendency for post-retirement expenses to increase in the first couple of years, as the increased leisure time could result in more holidays and trips to the mall. It may decrease 10 to 20% afterwards. But your employer no longer pays for the newspapers,leave travel, house rent, petrol or the doctor. And with a probable significant increase in medical expenses, or the desire to spend on grandchildren, any reductions in living expenses may be neutralized to a great extent.
6. Start planning very early :A part of your first salary cheque should go towards retirement, just like a part of it goes towards buying gifts for your dear ones. If you didn’t do that bit of saving, treat the next salary as your first.Albert Einstein is said to have called compound interest “the most powerful force in the universe.” When you are young, time is on your side. Take advantage of this by starting your investments at an early age. Unless you’re going to win a lottery, this is probably the only sure-fire way of retiring very comfortably. See examples of how compounding works. The Indian stock market has returned a compounded annual rate of at least 15% over any 20-year period. So Rs.1 lakh invested in an index fund today (or in a bunch of good companies) could become Rs.33 lakh in 2036. Adding Rs.1 lakh annually could leave you with a Rs.2.77-crore nest egg. If you stay invested, adding Rs.2 lakh a year could boost that to Rs.5.23 crore! Or take a safe scheme like the government’s Public Provident Fund, which returns a decent, tax-free 8% annually. Rs.70,000 (the maximum allowed in any year) invested with an addition of Rs.70,000 every year could leave you with Rs.60 lakh by 2036. You could double that by opening a second PPF account in your spouse’s name. And since your employer will also have a provident fund scheme, you could contribute any additional amount over the minimum 12%. If that works out to, say, Rs.1000, even doubling it to Rs.2000 per month can make a huge difference to the compounded tax-free returns you collect when you retire.
7. Avoid major changes in your lifestyle soon after retirement :
   Retiring from an active work-life is itself a very significant event and requires a lot of readjustment. Combining this with other events like changing your residence, children getting married or moving to other cities for employment, may make it even more difficult. If possible, try to avoid letting several major events in your life coincide with or around your retirement date.
8. You don’t have to stop working just because you retired :
   Most people today retiring at age 60 are healthy and in the prime of their careers.Your expertise could be sought after by other companies in your area of work.You may also have hobbies,like painting or writing, which you could convert to a full-time career. So while you are young, work around this and have a hobby you are passionate about. What’s important is that you keep your brain sharp and active. Any money earned can be a boon that will help you preserve, or even grow, your lifelong investments. Most people don’t realize that a regular salary, even a small one, is really worth a lot. I mean, if you retire today even with a modest Rs.50,000 monthly take-home pay, you’re actually as fortunate as a crorepati. Because if you wanted to generate a work-free,after-tax Rs.50,000, you’ll need Rs.1 crore invested in a fixed deposit at a good 8% interest.

I examined the Kumars’ file. Although they had a basket of wide-ranging investments, the amount invested in equities and equity mutual funds were limited. Equities are risky, but only in the short term—not for the young Kumars who have time on their side.Also, they didn’t separate investment earmarked for their sunset years from the rest. So I helped them fix this.Finally, I would also like to remind you that we can’t control regular inflation, but we can control lifestyle inflation by living a simpler life. If you plan well and reap the rewards,you can also continue to save and invest regularly even after you retire.

This article was written by Vishal Dhawan, CFP^CM and appeared in the Reader’s Digest  in  April 2011 issue .

 

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